In April 2015, more than 50 executives attended an IMD Discovery Event that explored what organizations can do to become and remain customer-led. The participants – senior managers from a variety of companies and industries – applied theoretical tools and principles to their personal business challenges and co-created new insights during this lively event.
What happens when organizations grow and enjoy success? Do they get caught in the “winner’s tornado” where increased complexity and growing demands on management lead them to spiral out of control and lose sight of why they became successful in the first place? How does this impact managerial focus, and what are the implications for leadership? In this insights@IMD we examine the challenges of maintaining organizational success and what organizations can do to become and remain customer-led.
Organizational growth and leadership focus
To begin the event, participants were asked to think about their businesses over the past five years and address two issues: (1) the extent to which their organization has grown organically relative to its main competitors; and (2) the extent to which the main focus of their organization’s leadership has evolved in terms of internal focus (e.g., organization, controls, cost cutting, compliance) versus external focus (e.g., market trends, customers, opportunities). As seen in Figure 1, the trend for participants shows that organizations experiencing higher organic growth were more externally focused, while those experiencing lower growth were more internally focused. Participants from higher growing organizations cited “an active outbound sales force” and “innovation on key customer insight” as reasons for success, while those from slower growing organizations cited “lack of customer insight” and “the need to manage growth by focusing internally on building the organization” as reasons for relative lack of success. These results confirm that an outside-in management focus matters.
Research by Professor Seán Meehan and Charlie Dawson illustrates the connection between organizational growth and leadership focus (see Figure 2). In a company’s early days, the need to attract and keep customers is pronounced and there are fewer layers between the management and customer-facing teams. An outside-in view is easier to maintain as leaders have to contend with fewer internal distractions. Externally focused, committed and assertive leadership, fueled by a belief in being customer-led, brings success in the form of organic growth.
As organizations mature, however, the demands in running the organization mean that leadership focus changes. Growth brings scale, mass and bureaucracy. Like a growing planet, the force of gravity increases, drawing managers’ focus inwards and leading them to concentrate their attention more strongly within their own organization. The result is that customers and markets are frequently further from their lives, since there are more layers between the management and customer-facing teams. The orientation changes from outside-in to inside-out, which undermines the belief that being customer-led is what brings success, personally and for the organization. What were previously leadership strengths – being focused, committed and assertive – have become liabilities by being redirected from the outside to the inside of the business.
This matters to companies because research suggests that if customer satisfaction levels are higher, then companies will grow faster and experience better performance.1 Thus, management’s preoccupation should be about being relevant to the lives of customers and bringing them something of value in relation to the alternatives they have. If management loses this outside-in perspective, then the organization’s performance suffers (see Figure 3). This is a common pitfall of organizations and research shows the difficulties of sustaining growth and profitability at the same time: Only 24% of companies managed to do both at the same time for 5 years and only 1% of companies maintained this over a 15-year period.2
Is the reorientation from outside-in to inside-out somehow inevitable as organizations grow? When we see successful companies fail and spiral out of control due to the “winner’s tornado,” it is a lazy association to attribute it to managerial hubris since many of these companies have highly committed and competent senior management teams. There could be another explanation – these companies are no longer able to continue being customer-led.
An approach to lasting success
Customer-led organizations have a deep understanding of what customers value that runs through the organization, and they are better than others at creating that value. This does not mean they continually ask customers what they think – it means they do not lose sight of the problems they are really solving, and continually look for new and better ways of doing so. Companies can achieve lasting success in this way, by focusing on execution and leadership. This matters to managers because the executional strengths and leadership behind customer-led growth become barriers to its continuation (see Tesco text box).